Global Bull Market Can Withstand Surging Oil and Bond Yields, Yardeni Research Says

The global bull market in equities can withstand the dual pressures of surging oil prices and rising government bond yields, thanks to the continued strength of corporate earnings, according to a note from Yardeni Research on Monday.

Earnings Outweigh Market Headwinds

Analysts at the firm noted that recent market developments would typically be enough to halt a bull market. These headwinds include:

• Brent crude oil prices climbing back above $100 a barrel.
• 10-year government bond yields rising above 5% in Australia and the U.K., and nearing that level in the U.S. at 4.97%.

Despite these factors, Yardeni Research stated that stock markets have remained resilient because "corporate earnings keep climbing." The firm suggested that equities appear to be interpreting the higher yields as a signal of strong economic and earnings growth, rather than as a threat to valuations.

A Case for Global Equities

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Yardeni reiterated its preference for a "Go Global" investment strategy, highlighting that overseas corporate earnings are soaring while valuations have not kept pace. The All Country World ex-U.S. index has seen its forward earnings increase by more than 40% year-over-year, yet it trades at a forward price-to-earnings (P/E) ratio of approximately 13, significantly below its 2021 peak.

The firm pointed to China as a notable exception, where falling bond yields reflect deflationary pressures in the economy.

Japan's Resilience

Focusing on Japan, which has been central to a recent bond selloff, Yardeni observed that while a strengthening yen has weighed on the Nikkei index, Japanese forward earnings have reached a record high.

With a forward P/E ratio of 15.5, the firm concluded that the Japanese market does not show signs of breaking under monetary policy pressure. "Record earnings against a 15.5 forward P/E is not what a market looks like when monetary policy is about to break it," Yardeni Research wrote.